UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______ to ______
Commission file number 2-39458
ERIE FAMILY LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1186315
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Erie Insurance Place, Erie, Pennsylvania 16530
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (814) 870-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 9,450,000 shares of Common
Stock outstanding on October 31, 2000.
1
<PAGE>
INDEX
ERIE FAMILY LIFE INSURANCE COMPANY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Statements of Financial Position--September 30, 2000 and
December 31, 1999
Statements of Operations--Three and nine months ended September 30, 2000
and 1999
Statements of Comprehensive Income--Three and nine months ended
September 30, 2000 and 1999
Statements of Cash Flows--Nine months ended September 30, 2000 and 1999
Notes to Financial Statements--September 30, 2000
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
<PAGE>
PART I. FINANCIAL INFORMATION
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(Dollars in thousands)
September 30, December 31,
ASSETS 2000 1999
-------------- ------------
(Unaudited)
<S> <C> <C>
Investments:
Fixed Maturities at fair value (amortized cost
of $698,366 and $651,659, respectively) $ 677,267 $ 628,877
Equity Securities at fair value
(cost of $130,390 and $124,674, respectively) 150,539 142,095
Real Estate 1,397 1,458
Policy Loans 7,508 6,724
Real Estate Mortgage Loans 8,331 9,975
Limited Partnerships 45,464 28,331
----------- ---------
Total Invested Assets $ 890,506 $ 817,460
Cash and Cash Equivalents 0 27,358
Premiums Receivable from Policyholders 4,312 4,056
Reinsurance Recoverable 1,245 464
Other Receivables 230 171
Accrued Investment Income 14,898 10,896
Deferred Policy Acquisition Costs 81,665 77,588
Reserve Credit for Reinsurance Ceded 7,532 6,927
Prepaid Federal Income Taxes 863 758
Other Assets 9,019 8,854
----------- ---------
Total Assets $ 1,010,270 $ 954,532
=========== =========
<FN>
See notes to financial statements
</FN>
</TABLE>
3
<PAGE>
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(Dollars in thousands)
September 30, December 31,
LIABILITIES AND SHAREHOLDER'S EQUITY 2000 1999
-------------- ------------
(Unaudited)
<S> <C> <C>
Liabilities:
Policy Liabilities and Accruals:
Future Life Policy Benefits $ 74,806 $ 70,329
Policy and Contract Claims 2,263 1,305
Annuity Deposits 575,158 569,218
Universal Life Deposits 103,903 94,640
Supplementary Contracts Not
Including Life Contingencies 590 581
Other Policyholder Funds 4,012 5,623
Deferred Income Taxes 25,261 17,853
Reinsurance Premium Due 273 692
Accounts Payable and Accrued Expenses 9,690 5,116
Note Payable to Erie Indemnity Company 15,000 15,000
Due to Affiliate 2,983 1,513
Dividends Payable 1,701 1,559
----------- ---------
Total Liabilities $ 815,640 $ 783,429
----------- ---------
Shareholders' Equity:
Common Stock, $.40 Par Value Per Share;
Authorized 15,000,000 Shares; 9,450,000
Shares Issued and Outstanding $ 3,780 $ 3,780
Additional Paid-In Capital 630 630
Accumulated Other Comprehensive Income (Loss) 7,874 ( 2,344)
Retained Earnings 182,346 169,037
----------- ---------
Total Shareholders' Equity $ 194,630 $ 171,103
----------- ---------
Total Liabilities and Shareholders' Equity $ 1,010,270 $ 954,532
=========== =========
<FN>
See notes to financial statements.
</FN>
</TABLE>
4
<PAGE>
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Revenues:
Policy:
Life Premiums, net of premiums ceded of
$638, $948, $2,741 and $2,444, respectively $10,741 $ 9,549 $31,523 $29,120
Group Premiums 632 627 1,965 1,877
------- ------- ------- -------
Total Policy Revenue $11,373 $10,176 $33,488 $30,997
Equity in Earnings of Limited Partnerships 1,122 314 3,492 658
Investment Income, net of expenses of
$456, $454, $1,373 and $1,322, respectively 14,259 13,824 43,989 40,781
Net Realized Gains on Investments 1,628 2,236 5,480 4,887
Other Income 244 220 759 592
------- ------- ------- -------
Total Revenues $28,626 $26,770 $87,208 $77,915
------- ------- ------- -------
Benefits and Expenses:
Death Benefits, net of reinsurance recoveries
of $961, $823, $2,246 and
$1,584, respectively $ 3,069 $ 2,505 $ 9,239 $ 7,736
Interest on Annuity Deposits 8,496 7,933 25,379 23,270
Interest on Universal Life Deposits 1,590 1,362 4,558 3,891
Surrender and Other Benefits 327 279 873 824
Increase in Future Life Policy Benefits, net of
the increase in reserve credit for reinsurance
ceded of $216, $204, $605 and
$598, respectively 1,249 1,439 3,872 3,760
Amortization of Deferred Policy Acquisition Costs 1,643 1,145 5,576 4,149
Commissions, net of reinsurance reimbursements
of $165, $266, $1,089 and $682, respectively 580 404 1,282 1,472
General Expenses 1,994 1,882 6,714 5,415
Taxes, Licenses and Fees 464 371 1,561 1,176
------- ------- ------- -------
Total Benefits and Expenses $19,412 $17,320 $59,054 $51,693
------- ------- ------- -------
Income From Operations $ 9,214 $ 9,450 $28,154 $26,222
Provision for Federal Income Taxes:
Current 2,455 2,610 7,835 7,607
Deferred 733 108 1,906 1,122
------- ------- ------- -------
Total Provision for Federal Income Taxes 3,188 2,718 9,741 8,729
------- ------- ------- -------
Net Income $ 6,026 $ 6,732 $18,413 $17,493
======= ======= ======= =======
Net Income Per Share $ 0.64 $ 0.71 $ 1.95 $ 1.85
======= ======= ======= =======
Dividends Declared Per Share $ 0.00 $ 0.165 $ 0.54 $ 0.66
======= ======= ======= =======
<FN>
See notes to financial statements.
</FN>
</TABLE>
5
<PAGE>
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net Income $6,026 $ 6,732 $18,413 $17,493
------ ------- -------- -------
Unrealized Gains (Losses) on Securities:
Unrealized Holding Gains (Losses) Arising
During Period 6,027 ( 14,524) 21,200 ( 39,069)
Less: Reclassification Adjustment for Gains
Included in Net Income ( 1,628) ( 2,236) ( 5,480) ( 4,887)
------ ------- ------- -------
Net Unrealized Holding Gains (Losses)
Arising During Period $4,399 ($16,760) $15,720 ($43,956)
------ ------- ------- -------
Income Tax (Expense) Benefit Related to
Unrealized Gains (Losses) ( 1,539) 5,866 ( 5,502) 15,385
------ ------- ------- -------
Other Comprehensive Income (Loss), Net of Tax $2,860 ($10,894) $10,218 ($28,571)
------ ------- ------- -------
Comprehensive Income (Loss) $8,886 ($ 4,162) $28,631 ($11,078)
====== ======= ======= =======
<FN>
See notes to financial statements.
</FN>
</TABLE>
6
<PAGE>
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
(Dollars in Thousands)
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $18,413 $ 17,493
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of bond and mortgage premium 156 211
Amortization of deferred policy acquisition costs 5,576 4,149
Real estate depreciation 62 62
Deferred federal income taxes 1,906 1,122
Realized gains on investments ( 5,480) ( 4,887)
Increase in premiums receivable ( 256) ( 12)
(Increase) decrease in other receivables ( 59) 96
Increase in accrued investment income ( 4,002) ( 3,410)
Policy acquisition costs deferred ( 9,652) ( 8,862)
Increase in other assets ( 166) ( 578)
Increase in reinsurance recoverables
and reserve credits ( 1,386) ( 887)
Increase in future policy benefits and claims 5,435 3,829
Decrease in other policyholder funds ( 1,610) ( 2,682)
(Decrease) increase in reinsurance premium due ( 419) 287
Decrease in federal income taxes payable ( 104) ( 567)
Increase in accounts payable and due to affiliate 6,040 240
------- --------
Net cash provided by operating activities $14,454 $ 5,604
------- --------
Cash flows from investing activities:
Purchase of investments:
Fixed maturities ($84,210) ($137,081)
Equity securities ( 28,686) ( 42,995)
Mortgage loans 0 ( 66)
Limited Partnerships ( 7,790) ( 9,105)
Sales/maturities of investments:
Fixed maturities 41,028 79,519
Equity securities 24,765 32,820
Limited Partnerships 1,966 1,664
Principal payments received on mortgage loans 1,645 116
Loans made to Policyholders ( 1,586) ( 1,108)
Payments received on policy loans 804 601
------- --------
Net cash used in investing activities ($52,064) ( 75,635)
------- --------
Cash flows from financing activities:
Increase in annuity and supplementary contract deposits $ 5,950 $ 30,788
Increase in universal life deposits 9,263 9,624
Dividends paid to Shareholders ( 4,961) ( 6,095)
------- --------
Net cash provided by financing activities $10,252 $ 34,317
------- --------
Net decrease in cash and cash equivalents ( 27,358) ( 35,714)
Cash and cash equivalents at beginning of year 27,358 44,808
------- --------
Cash and cash equivalents at end of quarter $ 0 $ 9,094
======= ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 648 $ 484
Income taxes 7,800 7,967
<FN>
See notes to financial statements
</FN>
</TABLE>
7
<PAGE>
ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
All amounts are in thousands of dollars
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine-month period ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. For further information, refer to the financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1999.
NOTE B -- INVESTMENTS
Management considers all fixed maturities and marketable equity securities
available-for-sale. Marketable equity securities consist primarily of common and
non-redeemable preferred stock while fixed maturities consist of bonds, notes
and redeemable preferred stock. Available-for-sale securities are stated at fair
value, with the unrealized gains and losses, net of tax, reported as a separate
component of Shareholders' equity. Management determines the appropriate
classification of fixed maturities at the time of purchase and reevaluates such
designation as of each statement of financial position date.
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
September 30, 2000
Fixed Maturities:
U.S. Treasuries and Government Agencies $ 12,117 $ 396 $ 20 $ 12,493
States and Political Subdivisions 195 8 0 203
Special Revenue 9,497 252 0 9,749
Public Utilities 71,743 1,045 2,430 70,358
U.S. Banks, Trusts and Insurance Companies 121,124 1,008 4,605 117,527
U.S. Industrial and Miscellaneous 407,323 2,829 15,012 395,140
Foreign Governments-Agency 2,993 0 71 2,922
Foreign Banks, Trusts and Insurance Companies 9,982 10 431 9,561
Foreign Industrial and Miscellaneous 57,728 383 4,804 53,307
-------- -------- -------- --------
Total Bonds $692,702 $ 5,931 $ 27,373 $671,260
Redeemable Preferred Stock 5,664 343 0 6,007
-------- -------- -------- --------
Total Fixed Maturities $698,366 $ 6,274 $ 27,373 $677,267
-------- -------- -------- --------
Equity Securities:
Common Stock $ 65,082 $ 29,337 $ 6,924 $ 87,495
Non-Redeemable Preferred Stock 65,308 555 2,819 63,044
-------- -------- -------- --------
Total Equity Securities $130,390 $ 29,892 $ 9,743 $150,539
-------- -------- -------- --------
Total Available-for-Sale Securities $828,756 $ 36,166 $ 37,116 $827,806
======== ======== ======== ========
</TABLE>
8
<PAGE>
ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
NOTE B -- INVESTMENTS (Continued)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1999
Fixed Maturities:
U.S. Treasuries and Government Agencies $ 9,390 $ 75 $ 63 $ 9,402
States and Political Subdivisions 2,055 45 0 2,100
Special Revenue 6,860 220 0 7,080
Public Utilities 61,886 765 2,939 59,712
U.S. Banks, Trusts and Insurance Companies 115,616 693 4,740 111,569
U.S. Industrial and Miscellaneous 396,128 2,257 16,076 382,309
Foreign Governments-Agency 2,991 0 111 2,880
Foreign Banks, Trusts and Insurance Companies 9,981 0 444 9,537
Foreign Industrial and Miscellaneous 46,752 295 2,759 44,288
-------- -------- -------- --------
Total Fixed Maturities $651,659 $ 4,350 $ 27,132 $628,877
-------- -------- -------- --------
Equity Securities:
Common Stock $ 61,075 $ 28,171 $ 5,852 $ 83,394
Non-Redeemable Preferred Stock 63,599 274 5,172 58,701
-------- -------- -------- --------
Total Equity Securities $124,674 $ 28,445 $ 11,024 $142,095
-------- -------- -------- --------
Total Available-for-Sale Securities $776,333 $ 32,795 $ 38,156 $770,972
======== ======== ======== ========
</TABLE>
If management determines that any declines in market value of these investments
are other than temporary, the securities will be written-down to the realizable
value and reflected in income. If a bond is in default of interest payments and
it is determined that liquidation of the security would be in the Company's best
interest, the security will be sold to return the proceeds to income producing
assets.
The Company participates in a securities lending program whereby certain
securities from its portfolio are loaned to other institutions for short periods
of time. A fee is paid to the Company by the borrower. Collateral that exceeds
the market value of the loaned securities is maintained by the lending agent.
The Company's policy is to require collateral equal to 102 percent of the market
value of the loaned securities. The Company has an indemnification agreement
with the lending agents in the event a borrower becomes insolvent or fails to
return securities. At September 30, 2000, the Company had loaned securities with
a market value of $20.2 million and secured collateral of $20.7 million.
Real estate investments are carried on the Statements of Financial Position at
cost, less allowances for depreciation and possible losses. Commercial mortgage
loans on real estate are carried at their unpaid balances, adjusted for
amortization of premium or discount, less allowances for possible loan losses.
Policy loans are carried at their unpaid balances. Limited partnerships include
U.S. domestic and foreign private equity, real estate and fixed income
investments. The private equity limited partnerships invest in small- to
medium-sized companies. The private equity limited partnerships are carried at
estimated market value with unrealized gains and losses reflected in
Shareholder's equity in accumulated other comprehensive income. Investment
income or loss is recognized on the sale of the equity investment. Real estate
and fixed income limited partnerships are recorded using the equity method,
which approximates the Company's share of the carrying value of the partnership.
9
<PAGE>
ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
NOTE B -- INVESTMENTS (Continued)
The components of equity in earnings (loss) of limited partnerships are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ----------------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Limited Partnerships - Private Equity $ 728 $ 32 $ 692 ($ 42)
Limited Partnerships - Real Estate 229 257 1,783 661
Limited Partnerships - Fixed Income 165 25 1,017 39
------- ------- ------- ------
$ 1,122 $ 314 $ 3,492 $ 658
======= ======= ======= ======
</TABLE>
NOTE C -- SEGMENT AND PREMIUM INFORMATION
The Company offers a range of products and services, but operates as one
reportable life insurance segment. The Company's portfolio of life insurance
includes permanent life, endowment and term policies, including whole life,
mortgage and decreasing term, group, and universal life insurance.
The following is a detail of life premiums and annuity and universal life
deposits by major product grouping.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ----------------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Life insurance premiums earned:
Term $ 7,195 $ 6,573 $21,750 $19,893
Whole life 1,346 1,232 4,090 3,771
Universal life 2,837 2,695 8,424 7,899
Other 633 624 1,965 1,878
------- ------- ------- -------
Total direct premiums earned $12,011 $11,124 $36,229 $33,441
Reinsurance, net 638 948 2,741 2,444
------- ------- ------- -------
Total policy revenue $11,373 $10,176 $33,488 $30,997
======= ======= ======= =======
Deposits:
Universal life $ 2,528 $ 2,759 $ 8,241 $ 8,676
Annuity 10,073 12,649 34,430 47,709
------- ------- ------- -------
Total deposits $12,601 $15,408 $42,671 $56,385
======= ======= ======= =======
</TABLE>
NOTE D -- REINSURANCE
The Company has entered into various reinsurance treaties for the purpose of
ceding the excess of life insurance over retention limits. Reinsurance contracts
do not relieve the Company from its obligations to Policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company. The
Company evaluates the financial condition of its reinsurers and monitors
concentrations of credit risk to minimize its exposure to significant losses
from reinsurer insolvencies. The Company considers all of its reinsurance assets
to be collectible, therefore, no allowance has been established for
uncollectible amounts. The Company's retention limit is $300,000 per life for
individual and group coverage. As of December 31, 1999, $1.4 billion of life
insurance in force was ceded to other companies. The Company had assumed $33.4
million of life insurance in force as of December 31, 1999 (all of which
pertains to Pennsylvania Employees' Group Life Insurance). Reinsurance
recoveries for the three months ended September 30, 2000 and 1999 were $961 and
$823, respectively. For the nine months ended September 30, 2000 and 1999,
reinsurance recoveries were $2,246 and $1,584, respectively.
10
<PAGE>
ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
NOTE E -- GEOGRAPHIC EXPANSION
On March 7, 2000, the Erie Insurance Group, of which the Company is a member,
announced its intention to expand its marketing territory into Wisconsin.
Wisconsin will be the tenth state served by the Company, in addition to the
District of Columbia. In Wisconsin, the Company intends to write all lines of
life and annuity products it currently offers.
NOTE F -- RECLASSIFICATION
Certain amounts, as previously reported in the 1999 financial statements, have
been reclassified to conform to the current year's financial statement
presentation.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the historical
financial information and the notes thereto included in Item 1 of this Quarterly
Report on Form 10-Q and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in our Annual Report on Form 10-K
for the year ended December 31, 1999 as filed with the Securities and Exchange
Commission on March 29, 2000.
FINANCIAL OVERVIEW
Net income decreased to $6,026,086 or $0.64 per share in the third quarter of
2000, compared to $6,732,355, or $0.71 per share, for the third quarter of 1999.
While the Company continued to produce strong investment gains and solid premium
growth, a 12.1% increase in total benefits and expenses, including a 10.0% rise
in benefits to Policyholders, contributed to the decrease in earnings per share
for the third quarter 2000. Net income for the nine months ended September 30,
2000 increased 5.3% to $18,412,617, or $1.95 per share, compared to $17,492,723,
or $1.85 per share, for the same period in 1999.
REVENUES
Analysis of Policy Revenue
Total policy revenue increased $1,197,088, or 11.8%, to $11,373,232 in the third
quarter of 2000. Contributing to this growth was an increase in premiums on
traditional life insurance policies of 9.4% to $8,541,560 for the quarter ended
September 30, 2000. Total policies in force on traditional life insurance
products increased 4.5% to 163,946 at September 30, 2000 compared to 156,899
policies at September 30, 1999. Total policy revenue increased $2,490,669, or
8.0%, to $33,488,151 for the nine months ended September 30, 2000, when compared
to the same period in 1999.
In late 1999, the Company introduced a new life insurance product: ERIE Flagship
Term. This new term insurance product is designed for sale of face amounts of
$300,000 and above and complements the Company's Term Protector series. The
Company retains 50% of the risk up to a maximum of $300,000 on each individual
life. This new product, net of reinsurance premiums ceded, contributed $923,029
to total life premiums for the nine months ended September 30, 2000.
Because this new term product is more competitively priced for larger face
amounts, the Company's reinsurance premiums ceded and related commission and
expense allowances have increased during 2000. The reinsurance premiums ceded
recognized in total life premiums for the Erie Flagship Term product amount to
$271,487 for the nine months ended September 30, 2000.
Analysis of Investment-related Income
Net investment income increased $434,961, or 3.2%, in the third quarter of 2000
due to increased levels of investment from cash flows generated by the Company's
operations and universal life deposits. Net investment income increased
$3,208,197 or 7.9%, for the nine months ended September 30, 2000. Total invested
assets of the Company were $890,505,883 at September 30, 2000, an increase of
$73,046,002, or 8.9%, over the December 31, 1999 levels.
The Company invests in U.S. domestic and foreign private equity, real estate and
fixed income limited partnerships. These investments represent 4.5% of total
assets of the Company. The Company's equity in earnings of these limited
partnerships increased $807,706 to $1,122,031 for the quarter ended September
30, 2000. For the nine months ended September 30, 2000, income from limited
partnerships increased $2,834,234 to $3,492,283.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
BENEFITS AND EXPENSES
Analysis of Policy-related Benefits and Expenses
Net death benefits on life insurance policies increased $564,001, or 22.5% in
the third quarter of 2000 to $3,069,124. For the nine months ended September 30,
2000, death benefits on life insurance policies increased $1,502,835, or 19.4%,
to $9,239,325. This increase is consistent with the increase in the face amount
of life insurance policies issued by the Company. The total face amount of
policies in force at September 30, 2000 was approximately $15.1 billion, an
increase of $1.7 billion, or 12.7%, over the September 30, 1999 amount of
approximately $13.4 billion. The Company's mortality experience has been
favorable over the long term and management believes its underwriting philosophy
and practices are sound.
Interest expense incurred on deposits increased 8.5% to $10,086,656 in the third
quarter of 2000, from $9,295,187 in the third quarter of 1999. For the nine
months ended September 30, 2000, interest expense incurred on deposits increased
$2,776,781 or 10.2%. The increase in interest expense was the result of an
increase in the credited interest rate on annuity deposits during the first
quarter of 2000 combined with the $33,134,592 increase in deposits at September
30, 2000 when compared to September 30, 1999. The interest rate credited on
universal life deposits ranges from 6.0% to 6.75% in 2000 and 1999 while the
rate credited on annuity deposits in 2000 increased to a range of 5.25% to 6.25%
from 5.0% to 5.75% in 1999.
The liability for future life policy benefits is computed considering various
factors such as anticipated mortality, future investment yields, withdrawals and
anticipated credit for reinsurance. The third quarter 2000 future life policy
benefit expenses were $1,248,684, compared to $1,438,409 in the third quarter of
1999, a decrease of 13.2%. For the nine months ended September 30, 2000, life
policy benefits increased $112,353 or 3.0%.
Amortization of deferred policy acquisition costs increased 43.4% to $1,642,431
in the third quarter of 2000. For the nine months ended September 30, 2000, the
increase in amortization of deferred policy acquisition costs was $1,426,868, or
34.4%. The increase in amortization expense was caused by refinements in
amortization methods used during interim periods during 2000 which more closely
reflect actual results.
Analysis of Other Expenses
Total operating expenses, excluding taxes, licenses and fees, increased 12.6% to
$2,573,899 in the third quarter of 2000 compared to $2,286,303 in the third
quarter of 1999. For the nine months ended September 30, 2000, these expenses
increased $1,108,637 or 16.1% to $7,995,929.
Certain operating expenses of the Company are paid by the Erie Indemnity
Company, the management Company of the Erie Insurance Group, and reimbursed
monthly by the Company. Additionally, a portion of the Erie Insurance Group
common overhead expenses attributed to the Company are also reimbursed monthly.
These expenses comprise the majority of the Company's general expenses.
General expenses include wages and salaries, Employee benefits, data processing
expenses, occupancy expenses and other office and general administrative
expenses of the Company. Certain general expenses of the Company, related to the
acquisition and underwriting of new policies, are deferred as policy acquisition
costs. Medical inspection and exam fees related to new business production,
wages, salaries and Employee benefits of underwriting personnel, and salaries,
Employee benefits and bonuses paid to branch sales Employees for the production
of life and annuity business, are all deferred.
General expenses, net of deferred policy acquisition costs, increased $111,286
or 5.9% to $1,993,657 for the quarter ended September 30, 2000. For the nine
months ended September 30, 2000, net general expenses increased $1,298,561 or
24.0%, to $6,714,098. During 1999, certain expenses, including salaries and
benefits, associated with the implementation of the Company's policy
administration system, CyberLife, were capitalized in accordance with SOP 98-1
and therefore not charged against income in 1999. The capitalization of these
costs ended in 1999 when the system was placed into use. These expenses are now
being charged against income. In addition, amortization of the capitalized costs
of the CyberLife system began in late 1999, when the system was placed into use.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Excluding the effect of the 1999 capitalized costs and current year
amortization, general expenses remained level for the nine months ended
September 30, 2000, as compared to the same period in 1999.
Another component of total operating expenses is commissions to independent
Agents. Direct commission costs include new and renewal commissions, production
bonuses and promotional incentives to Agents. Direct commission expenses are
reported on the Statements of Operations net of commissions received from
reinsurers. The reported expense is also affected by the amount of commission
expenses capitalized as deferred policy acquisition costs (DAC). Commissions,
which vary with and are related primarily to the production of new business,
have been deferred and are capitalized as DAC. Most first-year and incentive
commissions and some second-year commissions qualify for deferral as DAC. For
the nine months ended September 30, 2000, commission expense decreased $189,923
or 12.9%, to $1,281,831. The commission allowance received from reinsurers has
increased $407,164 to $1,089,403, for the nine months ended September 30, 2000,
due primarily to the introduction of the new ERIE Flagship Term product in late
1999.
Taxes, licenses and fees increased $93,361 to $464,215 in the third quarter of
2000 compared to $370,854 in the third quarter of 1999. For the nine months
ended September 30, 2000, these expenses increased $384,919, or 32.7%, to
$1,561,355, compared to $1,176,436 for the nine months ended September 30, 1999.
A portion of this is the result of an increase in state premium tax expense due
to increased premium volume and decreased guarantee association tax credits
allowed to offset premium tax expenses. The remaining increase is due primarily
to a second quarter 2000 refund of premium tax reimbursements collected from a
reinsurer in prior years.
FINANCIAL CONDITION
Reserve Liabilities
The Company's primary commitment is its obligation to meet the payment of future
policy benefits under the terms of its life insurance and annuity contracts. To
meet these future obligations, the Company establishes life insurance reserves
based upon the type of policy, the age of the insured, and the number of years
the policy has been in force. The Company also establishes annuity and universal
life reserves based on the amount of Policyholder deposits (less applicable
policy charges) plus interest earned on those deposits. On September 30, 2000,
there was no material difference between the carrying value and fair value of
the Company's investment-type policies. These life insurance and annuity
reserves are supported primarily by the Company's long-term, fixed-income
investments, as the underlying policy reserves are generally also of a long-term
nature.
Investments
The Company's investment strategies are designed and portfolios are structured
to match the features of the life insurance and annuity products sold by the
Company. Annuities and life insurance policies are long-term products,
therefore, the Company's investment strategy takes a long-term perspective
emphasizing investment quality, diversification, and superior investment
returns. The Company's investments are managed prudently on a total return
approach that focuses on current income and capital appreciation. The Company
has not held or issued derivative financial instruments in 2000 or 1999.
The Company's invested assets are liquid in order to meet commitments to our
Policyholders. At September 30, 2000, the Company's investment portfolio
consisting of cash, marketable short-term investments, investment grade bonds,
common stock, and preferred stock, totaled $811.3 million or 80.3% of total
assets. These resources provide the liquidity the Company requires to meet the
unforeseen demands on its funds.
At September 30, 2000, the amortized cost of the Company's five largest
investments in corporate debt securities totaled $33.2 million, none of which
individually exceeded $8.0 million. These investments had a market value of
$33.4 million.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The Company's investments are subject to certain risks, including interest rate
and price risk. The Company monitors exposure to interest rate risk through
periodic reviews of asset and liability positions. Estimates of cash flows and
the impact of interest rate fluctuations relating to the investment portfolio
are monitored regularly. Price risk is defined as the potential loss in
estimated fair value resulting from an adverse change in prices. The Company's
objective is to earn competitive relative returns by investing in a diverse
portfolio of high-quality, liquid securities. Portfolio characteristics are
analyzed regularly and market risk is actively managed through a variety of
techniques. Portfolio holdings are diversified across industries and
concentrations in any one company or industry are limited by parameters
established by management and the Company's Board of Directors.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the Company's ability to secure enough cash to meet
its contractual obligations and operating needs. Generally, insurance premiums
are collected prior to claims and benefit disbursements and these funds are
invested to provide necessary cash flows in future years. The Company's major
sources of cash from operations are life insurance premiums and investment
income. The net positive cash flow is used to fund Company commitments and to
build the investment portfolio, thereby increasing future investment returns.
Net cash provided by operating activities for the nine months ended September
30, 2000 was $14,454,418 compared to $5,603,453 for the nine months ended
September 30, 1999. The Company's liquidity position remains strong as invested
assets increased by more than $73 million during the first nine months of 2000
to $891 million.
Annuity and universal life deposits, which do not appear as revenue on the
financial statements, are a source of funds. These deposits do not involve a
mortality or morbidity risk and are accounted for using methods applicable to
comparable "interest-bearing obligations" of other types of financial
institutions. This method of accounting records deposits as a liability rather
than as a revenue. Annuity and universal life deposits were $12,600,873 in the
third quarter of 2000 and $15,408,713 in the third quarter of 1999.
The Company's current commitments for expenditures as of September 30, 2000 are
primarily for policy death benefits, policy surrenders and withdrawals, general
operating expenses, federal income taxes, and dividends to Shareholders. These
commitments are met by cash flows from policy revenue, annuity and universal
life deposits and investment income. Management believes its cash flow from
operations and its liquid assets and marketable securities will enable the
Company to meet any foreseeable cash requirements.
As an added measure of liquidity, the Company has arranged for a $10 million
line of credit with a commercial bank. At September 30, 2000 and 1999, there
were no borrowings on this line of credit.
The Company's fourth quarter dividend was approved by the Board of Directors on
October 10, 2000. The $0.18 per share dividend will be paid on January 2, 2001
to Shareholders of record as of December 19, 2000. In 1999, the Company's
quarterly dividend was declared on September 14, to be paid on January 3, 2000.
The Company's 1999 year-end Risk Based Capital Analysis as reflected in its 1999
statutory annual statement shows total adjusted capital of $128,324,572 and
authorized control level risk based capital of $26,506,217. These results are
indicative of the strong capital position of the Company and are well in excess
of levels that would require regulatory action.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk is primarily related to fluctuations in
prices and interest rates. Quantitative and qualitative disclosures about market
risk resulting from changes in prices and interest rates are included in Item
7A. in the Company's 1999 Annual Report on Form 10-K. There have been no
material changes in such risks or the Company's periodic reviews of asset and
liability positions during the nine months ended September 30, 2000. The
information contained in the Investments section of Management's Discussion and
Analysis of Financial Condition and Results of Operations is incorporated herein
by reference.
********************
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995: Certain forward-looking statements contained herein involve risks and
uncertainties. Many factors could cause future results to differ materially from
those discussed. Examples of such factors include but are not limited to: better
(or worse) mortality rates, changes in insurance regulations or legislation that
disadvantage the Company in the marketplace and recession, economic conditions
or stock market changes affecting pricing or demand for insurance products or
ability to generate investment income. Growth and profitability have been and
will be potentially materially affected by these and other factors.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Fianacial Data Schedule
All other exhibits for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore, have been omitted.
The Company did not file any reports on Form 8-K during the three-month period
ended September 30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Erie Family Life Insurance Company
(Registrant)
Date: November 13, 2000 \s\ Stephen A. Milne
(Stephen A. Milne, President & CEO)
\s\ Philip A. Garcia
(Philip A. Garcia, Executive Vice President & CFO)
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